For many, one of the largest barriers to homeownership is saving up for a down payment—the portion of the home’s cost you pay up-front. And with the median home price continuing to surge, hitting a record high of $440,300 nationwide earlier this year, a would-be homebuyer needs to come up with about $88,000 if they are following the 20% down payment rule of thumb (though the median down payment is actually 13%), plus another 2% to 6% of the loan balance for closing costs.
As such, many lenders are now offering “zero-down” mortgages and down payment grants to help aspiring homeowners overcome these hurdles. But they aren’t available to everyone, most aren’t actually zero down and, even if you qualify, getting one might not be your best move. Here’s what you need to know about the different options.
As the name suggests, a real zero-down mortgage is a home loan you can get without securing it up front with a down payment. But these types of mortgages are rare and only offered to certain groups.
One is the U.S. Department of Veterans Affairs’ VA Home Loans. These loans are only available to active-duty service members, veterans and eligible surviving spouses. Another is the USDA Home Loan, a no-down-payment mortgage for low- and moderate-income people buying homes in USDA-approved rural areas.
Down Payment Grants
Down payment grants don’t have to be paid back, but they typically don’t cover the entire down payment cost and the programs that offer them tend to have strict qualifications. For example, they might only be available to first-time homebuyers, low- to moderate-income people or those living in certain areas (some also require borrowers to complete a home-buying course).
One such program is Bank of America’s Community Affordable Loan Solution, designed to help first-time homebuyers in predominantly Black and Latinx neighborhoods purchase a home with no down payment, no mortgage insurance and no closing costs. It’s currently only available in five metropolitan areas: Charlotte, North Carolina, Dallas, Detroit, Los Angeles and Miami, but may expand to other cities.
Bank of America also has a Down Payment Grant Program that provides a grant of up to 3% of a home’s purchase price (capped at $10,000). Maximum income and loan amount limits apply depending on the house’s location. You can visit the Bank of America Down Payment Center and select your state from the drop-down list to see what’s available in your area.
JP Morgan Chase and TD Bank have similar grant programs, offering $5,000 for down payments or closing costs to Black and Hispanic homebuyers.
Down Payment Assistance Mortgages
Down payment assistance is a second loan you take out to cover the down payment on your first mortgage. These programs might be available through local or state governments or individual lenders.
They typically take one of two forms:
- Forgivable, 0% interest loans you don’t need to pay back as long as you stay in the home for a set number of years—usually anywhere from five to 15 years.
- Deferred-payment loans with 0% interest that must be paid back when you sell, refinance or pay off your first mortgage.
Check out the U.S. Department of Housing and Urban Development’s list of homebuying programs by state to research what’s available in your area.
Even if you qualify for a zero-down mortgage or similar assistance program, there are a few drawbacks to be aware of.
Your interest rate may be higher. Not having savings for a down payment indicates to potential lenders that you’re a higher-risk borrower—and lenders typically charge higher interest rates to high-risk borrowers. In addition, down payment grants usually require you to get your loan from a particular lender, so you don’t have the opportunity to shop around for the lowest rate.
You’re more likely to wind up underwater. Being “underwater” on your mortgage means you owe more than the property is worth. Since you’re borrowing 100% of the purchase price (or less depending on the program), there’s a greater risk that you’ll be underwater if property values decline, making it difficult to sell or refinance.
Your monthly payments will be higher. If your down payment is lower, your monthly payment will be higher. In addition, you may have to pay for private mortgage insurance—insurance that protects the lender if you default on the loan—which also increases your monthly payments.
With that said, these types of programs may help you achieve your homeownership goal faster than trying to save for a down payment, so it is worth checking to see if you qualify. Just keep in mind that they could also end up costing you more in the long run.
If possible, consider low down payment mortgage options, such as Fannie Mae’s HomeReady program or Freddie Mac’s Home Possible loans. They could save you thousands of dollars over the course of a 30-year mortgage.
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Janet Berry-Johnson is a certified public accountant and freelance writer who enjoys making complicated topics, like accounting and taxes, easy to understand.